What’d I Miss?
This week we heard from several major banks which posted decent fourth quarter earnings and favorable, though cautious, outlooks for 2025. JP Morgan#, Citigroup#, Goldman Sachs#, and Wells Fargo# all reported Q4 2024 earnings above expectations. This was led mostly by higher trading volume and investment banking fees. In fact, investment banking fees at Citigroup, Wells Fargo, JPMorgan, and Goldman Sachs rose a respective 42%, 62%, 37%, and 24% from the prior year. Both JPMorgan and Wells Fargo gave bullish 2025 guidance on net interest income as well. Based on Federal Reserve data, loans grew 6.7% annualized during Q4 with commercial loans rising 6.6%, but commercial real estate growth of only 0.3%. Residential real estate loans grew by 1.9% while consumer loans gained 11.3%. Bank reports out this week generally corroborated this positive data.
We also received data on U.S. consumer price inflation on Wednesday, which came in slightly below expectations. Coupled with the strong bank earnings reports, this resulted in a drop in 10-year rates and a very positive stock market reaction yesterday. This comes after months of faster underlying inflation persuaded the Federal Reserve to signal a pause in interest rate cuts. On a year over year basis, the headline CPI increased 2.9%. The “core” consumer price index, which excludes food and energy costs, increased 3.2%. The advance in the CPI was led by food prices, airfares, new and used car prices, auto insurance and medical care costs. Shelter prices, the largest category within services, slowed its rate of increase somewhat but was still up 4.6% over the prior year.
It’s Quiet Uptown.
The first data for New York City’s new congestion pricing program shows that traffic gridlock lessened in its initial week as fewer drivers traveled into the core of Manhattan, midtown and below. The Federal Reserve’s latest Beige Book report of economic activity noted light traffic but generally steady growth overall. Slight to modest economic growth was noted across most districts, but with more respondents optimistic about 2025 than pessimistic. Combined with last week’s strong jobs report, policymakers are widely expected to leave rates unchanged at their meeting later this month, and traders generally do not see another cut until possibly mid-year.
What comes next?
The first couple of weeks of a new Broadway musical can make or break the production. In the first couple of weeks of January, we have seen a bit of a rocky start in financial markets. The S&P500 and Nasdaq indexes are both up about 1% this year after starting on a sour note before yesterday’s bounce. Sometimes January is an indicator of the rest of the year, but not always. Especially after two strong years in equity markets and deferred gains, some digestion is usually in order. Looking ahead to 2025, corporate earnings are expected to grow by about 12%. Forecasts call for 2.1% U.S. GDP growth in 2025 and 2% in 2026, while overall world GDP growth is expected to be in the range of 3%, a decent backdrop for further corporate earnings gains. The Buffet Indicator, which is the total stock market valuation to GDP ratio, is at an all-time high while other measures suggest that equity market valuations are elevated above historical ranges. Movements in long-term interest rates will drive volatility along the way until inflation, employment and Fed policy align.
Washington On Your Side
Alexander Hamilton was a proponent of a strong Federal government. However, the U.S. government now accounts for about 34% of our total economy as measured by GDP. This is well above historical levels, has grown through both Democrat and Republican administrations, and has resulted in a debt that recently hit $36 trillion. For perspective, government spending as a percentage of GDP was barely 6.5% in 1907, of course this was before federal income taxes were levied. Over a longer period of time, this figure has averaged closer to 26%. Interest payments on the national debt reached $308 billion in the government’s first fiscal quarter, marking a 7 percent increase from the same period last year. Interest on the federal debt is expected to breach $1.2 trillion this year, potentially more than Healthcare, Defense and Social Security categories. Bank earnings reports so far suggest steady growth ahead for the economy, but as noted in the Hamilton Song: My Shot, “we need to handle our financial situation.”
Lin-Manuel Miranda turns 45, Kate Moss turns 51, and singer Sade smoothly turns 66. Director John Carpenter (gasp!) turns 77 (Halloween, the Thing).
Christopher Crooks, CFA®, CFP® 610-260-2219